11:42 20.05.2024


Challenges and prospects of Ukrainian commercial real estate during the war – UTG

10 min read
Challenges and prospects of Ukrainian commercial real estate during the war – UTG

Vadim Neposedov, founder and President UTG

The market of commercial real estate of Ukraine has changed dramatically in all segments in the coronary-veil and continues further transformation during the war. Consider how trade, office and residential real estate responds to stress calls.

Trade real estate - development within a rigid economy

Retail feels a dramatic change in consumer preferences, with a decrease in the number of consumers, the fall of the well-being of a large part of citizens and a significant increase in the income of the military. At the same time, 53% of citizens talk about a drop in income during surveys, and 67% had a significant increase in spending, primarily on housing and communal services, food, health care, and transport. Two categories show growth – military goods and life support systems to counter the consequences of shelling of power plants and boiler houses (solar panels, charging stations, generators, autonomous Internet, flashlights, potbelly stoves, radiators, batteries).

Forced migration abroad (about 5 million of our compatriots) caused a reduction in the share of the retail chain – not only the closure of luxury stores (Chanel, Cartier), but also a reduction in child-oriented services (children’s entertainment, education, sports, goods and toys). The war as a whole stung the segment focused on adult leisure. For example, today the feasibility of buying evening wear is extremely low. Operators of entertainment (cinemas, distribution centers, bowling alleys), sports and catering establishments work very restrainedly.

With regard to the proposal of brands - with the beginning of the war, the total exit from the Ukrainian market retailers from russia has ended (although attempts are made to re -register some for Ukrainian legal entities). International networks were temporarily closed against the backdrop of the absence of alternative department stores. The good news - flagships, H&M and Inditex brands, rating the balance of risk, returned.

As for the offer of brands, with the beginning of the war, the total withdrawal of retailers from russia from the Ukrainian market was completed (although there are attempts to re-register some of them to Ukrainian legal entities). Stores of international chains were temporarily closed against the background of the lack of alternative department stores. The good news is that the flagships, H&M and Inditex brands, having assessed the balance of risks in demand, are back.

As for domestic brands, they are developing despite limited opportunities, lack of reserves for rapid expansion and scaling, and a shortage of acceptable lending mechanisms. Among the active players are Goldi, Vovk, Solmar, Stimma, Wear Me, Maritel, etc. "All Svoi" stores open in key SECs and occupy areas that make it possible to call them anchors.

But for the sustainable development of domestic demand, Ukrainian fashion chains are not enough. Due to the war, some of them were forced to close, some repurposed for military products, entered international marketplaces (Etsy), some changed their priority to development in European countries, etc.

The general trend of chains, both domestic and international brands, is optimization. Taking into account the income, a decision is made on the number of stores (focusing exclusively on profitable objects, closing unprofitable ones) and expenses (reduced for advertising, marketing, total savings in utility bills, heating, air conditioning, electricity, water).

A risk factor (or development opportunities) is the expansion of online commerce, which, on the one hand, exacerbates the drop in store traffic, and on the other hand, increases conversion.

A significant block of problems faced by retail can be called all-Ukrainian - logistics, staff shortages, rising prices for raw materials, energy problems, etc.

As of today, there is a tenant’s market in retail real estate. Operators slow down expansion, refuse to invest, reduce the cost of repair work (choose "fit-out", opening in ready-made premises), transfer risks to the developer (payment % of RTO)

At the same time, the active development of retail in previous years led to the saturation of the market with retail space. And today, against the backdrop of declining consumer sentiment, we see a dispersion of attendance, an increase in vacancy, a drop in rental rates, and an increase in NUTS.

Migration processes continue: relocation of operators from the east / south to the west due to the destruction of the SEC as a result of shelling, a physical threat to further functioning. Due to the war, the focus of developers’ attention is shifted not only to new regions, but also to new segments and alternative industries.

Residential real estate: an increase in cost on a background of large-scale destruction and a decrease in purchasing power

The housing market is the most critical. According to the KSE study, at the beginning of 2024, 88.9 million sq.m were destroyed or damaged. housing, or 8.6% of the all-Ukrainian housing stock. Restoration of a significant amount of the destroyed housing stock (Mariupol, Bakhmut, Avdiivka, Kherson, Kharkiv) is currently impossible or difficult.

The housing market in the frontline and eastern regions is frozen (almost complete absence of housing sales against the background of a significant increase in the supply put on the market).

As for other regions, in Ukraine there is a decrease in the purchasing power of citizens, budget restrictions and a decrease in the area of housing chosen for themselves, and at the same time - a freeze in speculative demand. Before the war, the share of investment/speculative purchases was on average 40-50% in the market, in some objects more than 70%. In 2022-2024, the vast majority of transactions, from 85-90%, are related to improving their own housing needs or moving to relatively calmer regions.

At the same time, against the background of a decrease in the purchasing power of the population, there is a rapid increase in the cost of new buildings. Not only due to changes in the price of building materials, wages of workers, but also due to the increase in the requirements of buyers themselves - for the introduction of modern technologies (panoramic glazing, curtain wall systems), autonomous and advanced engineering systems (heat pumps, generators, solar panels, air conditioning, ventilation), for public areas and infrastructure.

The issue of the shortage of solvent borrowers should be solved by the eOselia affordable mortgage program and the expansion of the eRecovery program (which allows you to use a certificate for destroyed housing to buy a new one). Recently, the number of preferential mortgages issued exceeded 10 thousand loans, but only about 3% of them are in facilities under construction. Thus, it is too early to say that this tool stimulates new buildings, but plans have been announced that the share of mortgages for housing under construction should reach 40%.

Among the trends of 2022-23, which will only intensify in the coming years, is a shift in the attention of potential buyers and, as a result, developers to projects in the suburbs. Among the many advantages of such buildings is the ability to make them more autonomous. And the state program for the construction of intercity highways has further accelerated the urbanization of the suburbs and the active development of local infrastructure (shopping, entertainment, social, engineering).

Office Real Estate: Search for New Customers and New Formats

The problem, or rather the task of searching for new meanings of office real estate, is a global one. In Ukraine, the global problem is exacerbated by the challenges of war.

The restrictions of the pandemic led to the transfer of staff to remote work – most companies (including the IT segment) showed a significant slowdown in dynamics, shifted to low-demand representative offices, rationalized the cost part, reduced the absorption of occupied space, changed formats, and moved to areas far from the center. The largest Ukrainian corporations have transferred employees from rented premises to their own administrative real estate.

The armed aggression of the russian federation has led to a massive outflow of russian companies - the number of international companies represented in Ukraine and their representative offices (the main consumers of professional office real estate) has decreased. The negative trend was exacerbated by the refusal of Ukrainian companies to cooperate with russia, a complete shutdown of work, the closure of representative offices, and the suspension of sales of new services.

At the same time, there was a relocation and further legalization of personnel abroad. Internal relocation is especially typical for international companies – EPAM, SoftServe, GlobalLogic, Luxoft, Ubisoft, Ciklum, ELEKS, Dev.Pro, Playrix, DataArt, AirSlate.

The war was superimposed on the global crisis: rising costs, a decrease in profit growth, and a reassessment of further development strategies led to the cessation of hiring and optimization of the staff of international firms. 229 companies in the world, including the largest IT giants (MAGMA (Microsoft, Apple, Google, Meta, Amazon), Snapchat, Twitter) are laying off employees.

In Ukraine, the very functioning of offices as objects has become a challenge. Safety requirements have increased due to the threat of shelling and air raids (the need for shelters), the autonomy of engineering networks (emergency generators), and the life support of buildings (elevators), especially in multi-storey towers.

Given the rising cost of energy, the rise in utility bills, OPEX [due to rising vacancy rates and the distribution of operating payments to fewer operators], the burden on tenants is increasing, and rental rates are decreasing.

In the market will be able to hold on to a stronger and more flexible

As you can see, each of the segments of commercial real estate needs to get better in order to keep the consumer’s attention. During a full-scale war, even the most experienced developers do not risk implementing projects without an up-to-date viable concept and the support of a qualified broker. Especially when it comes to development in new regions (Western part of Ukraine, Central, Southern), related segments (retail, apartment complexes, low-rise housing, cottage townships, hotel and office real estate), when opening new directions (retail parks, coworking spaces, mixed-use) or searching for alternative project financing schemes.

War is the most terrible challenge. But not the first challenge and not the first crisis through which our company helped to guide its clients. Clients trust UTG to develop concepts in the most difficult times of crisis in 2004, 2007/2008, 2013/2014, 2019/2020 to create the best objects on the market. This is how the Ocean Plaza, Gulliver, Lavina Mall, GorodOk, Globus, Araks, Smart Plaza Polytech, Smart Plaza Obolon, 101 TOWER business center, Taryan Towers, RiverStone, Parkove Misto (all Kyiv), MOST city, Appolo, Terra (Dnipro), Donetsk City (Donetsk), Global.UA (Zhytomyr), Meganom (Simferopol), Oasis (Khmelnytskyi), Riviera, Megadom (Odesa), Ukraine (Mariupol) and many others SECs appeared in all regions of Ukraine.

Now, in 2022/2024, the UTG team has been entrusted with the formation of the revenue side and the recruitment of tenants on the terms of exclusive SECs Brigantina, Megamall (Vinnytsia), Sich (Dnipro), Global UA (Zhytomyr), Pokrovsky (Izmail), Sofia Mall, White Lines (Kyiv), IT Town (Odesa), Festival (Sumy), Planeta Mall (Kharkiv), TEMP, Proskyrov Plaza (Khmelnytskyi), Trade Mall (Uzhhorod).

In recent years, clients have increasingly entrusted UTG with specific research and industry-specific analytics – industrial/technology parks, logistics complexes, commercial educational institutions, specialized medical/rehabilitation centers, gerontological boarding houses, etc.

The recovery of the country’s economy will take place due to a large number of investment projects (especially at the expense of concessional / grant / targeted / credit funds of the EU, the USA, Asia), in the context of significant intensification of competition both within the country and with neighboring regions. There is already an increase in demand and demand for the services of consultants from international organizations and institutions that get acquainted with the local market, probe the potential of opportunities, study commercial conditions by region, analyze promising segments, and study legal practice to enter Ukrainian market.

In the next four years, foreign companies and international capital will begin to enter the market en masse, so the demand for consulting services will only grow. UTG is ready to provide qualified assistance to both compatriots and foreign investors. By creating successful commercial projects, we create growth points for communities and the country’s economy as a whole.